Bitcoin Tax-Free Transactions Face Test at Top EU Court

Tax-free trading of bitcoin faces a legal test at the European Union’s top court after Swedish authorities sought to extend existing levies to virtual currencies.

The EU Court of Justice must decide if transactions between virtual and traditional currencies can be classed as a service under EU value-added tax rules, and if so, whether such trades are tax-exempt, according to a court filing.

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The case may help clarify powers of tax authorities over bitcoin as central bankers who regulate supplies of traditional currencies from the euro to the pound grapple with its emergence as an alternative means of payment. Banks shouldn’t buy, hold or sell virtual currencies until regulators develop safeguards to protect their integrity, the European Banking Authority said earlier this month, citing risks including identity theft to the possibility hackers could target a trading platform.

“Nothing specific is arranged for bitcoins or virtual currency” in EU tax rules that stem from 1993, said Rogier Vanhorick, a tax adviser at Deloitte in Rotterdam. “We’re constantly seeing a lot of these new concepts and the ECJ is having to give an explanation for this dinosaur-type of legislation.”

The Luxembourg-based tribunal is examining a dispute between Sweden’s tax agency and David Hedqvist, who wanted to start selling bitcoins on his website. Sweden’s tax authorities are challenging an earlier Swedish court ruling that said VAT shouldn’t be charged on bitcoin trades.

Hedqvist said he initially sought a court ruling to clarify how bitcoin should be taxed after he didn’t get clear answers from tax authorities. The currency is slowly gaining popularity in Sweden, he said in an e-mail, and would pick up steam “if there were no legal uncertainties.”

Bitcoins emerged in 2009 out of a paper authored under the pseudonym Satoshi Nakamoto. Since then, retailers selling items from Gummi Bears to luxury homes have started accepting bitcoins, and new companies have begun offering ways to ease its use as a payment system.

The currency gained credibility after law enforcement and securities agencies said in U.S. Senate hearings that it could be a legitimate means of exchange.